A Looming Tax on High-End Health Plans Draws Fire

Lawmakers on both sides of the aisle want to end the 'Cadillac tax'

About half of all American adults get health insurance through their employer, and beginning in 2018, the government will impose heavy financial penalties on any employer-provided health plans it deems overly generous. The tax was designed to rein in healthcare inflation and raise tens of billions of dollars.

Former senator Jeff Bingaman (D-N.M.) a member of the working group that created what's come to be called the Cadillac tax, says if companies were more demanding shoppers, then insurers -- as well as doctors, hospitals, and other healthcare providers -- would have stronger incentives to keep prices low.

"I think we saw it as a way to keep the cost of health care from continuing to grow at the rate that it had been growing," Bingaman said.

Under the Affordable Care Act, any health plan for employees that costs more than $10,200 annually for an individual, or $27,500 for a family, will be subject to the tax. For those plans, any amount over those caps will taxed at 40%.

All agree the rule will raise cash: The Congressional Budget Office estimates the tax will generate $87 billion for the federal government by 2025.

Estimates on how many employer plans will be subject to the tax vary widely. Consulting firm Towers Watson says that as many as half of these company plans are on track to trigger the Cadillac tax in 2018.

Still, being on track to get hit and actually paying the tax are different things, said Elise Gould of the Economic Policy Institute.

"Health insurance providers are going to provide plans that are cheaper," she said. "And, all else equal, cheaper plans are thinner plans, which means that consumers are going to have to pay more out-of-pocket."

Opponents of the tax fear that more out-of-pocket costs for consumers will add to the difficulty many Americans already have paying their medical bills, now that high-deductible health plans are commonplace.

"Trying to control health care costs by sharply increasing peoples' out-of-pocket costs is not good health policy because it discourages people from getting care that they need," said Rep. Joe Courtney, a Democrat from Connecticut, who is leading a House effort to scrap the tax. Bipartisan bills aimed at repeal are already making their way through both the House and Senate, even though repealing the tax would increase the budget deficit.

"The opposition has really grown like wildfire," Courtney said. "I dropped my bill back in February with a handful of co-sponsors; we're up to 145 on my legislation."

But a large number of economists, including Henry Aaron of the Brookings Institution, are publicly urging lawmakers to let the tax stand. In a letter sent this month to congressional finance leaders, the economists write that Congress should "take no action to weaken, delay, or reduce the Cadillac tax until and unless it enacts an alternative tax change that would more effectively curtail cost growth."

Speaking from his own experience as a patient, Aaron says that without such a tax, motivating doctors and patients to hold the line on expensive tests is very difficult.

"I could tell you stories," he said, "[W]here doctors interacting with me were quite explicit in saying, 'Well, are you covered for insurance on this? If so, let's do it. I'm not sure it's going to make any difference in your treatment, but you'll feel better.'"

The tax could cut annual U.S. health spending by 3 percent to 4 percent – as much as $60 billion by 2024, according to the Congressional Research Service.

Still, said economist Jared Bernstein, "I don't think that it's going to be nearly as biting as lots of people claim." Plans deemed excessive would only be taxed on the amount that surpasses the annual limit, he explains.

"So the issue isn't, 'How many plans are over the threshold?" he said. "It's 'How much of the plans' costs are over the threshold?' And if you look at that, you get a much smaller number."

The Cadillac tax is the latest in a string of attempts to bring down the cost of healthcare by shifting more of the bill to consumers – encouraging them to be savvier shoppers. Some critics of that approach, however, say it dodges the real problem: how much hospitals, doctors, and other healthcare industry players charge.

This article, which first appeared Oct. 15, 2015, is part of a partnership that includes Minnesota Public Radio, NPR and Kaiser Health News. It was reprinted from kaiserhealthnews.org with permission from the Henry J. Kaiser Family Foundation. Kaiser Health News, an editorially independent news service, is a program of the Kaiser Family Foundation, a nonprofit, nonpartisan health policy research and communication organization not affiliated with Kaiser Permanente.

More in Washington-Watch

MedPageToday is a trusted and reliable source for clinical and policy coverage that directly affects the lives and practices of health care professionals.

Physicians and other healthcare professionals may also receive Continuing Medical Education (CME) and Continuing Education (CE) credits at no cost for participating in MedPage Today-hosted educational activities.